Fierce Probiotic Rivalry and China Investment to Damp Meiji's Profits; Awaiting New Product Launch

We have reduced narrow-moat Meiji’s fair value estimate to JPY 9,100 from JPY 9,800 to reflect a delayed probiotic launch in additional to fierce competition in the space at home. Fourth-quarter operating profit beat its revised profit guidance and our estimate, mainly attributable to better-than-expected pharma profits. Despite its price hike efforts to offset cost increase, volume contraction of lucrative probiotic yogurt, caused by intensified competition and lack of large-scale new products, is likely to cap or further dampen its profit growth. Moreover, increased investment in China combined with impact of lockdowns of many first tier and second tier cities will also weigh on profits. While we see a handsome 37% upside to our new intrinsic value, investors might not renew their appetite for the name until Meiji demonstrates top line growth which requires new hit products to bolster domestic probiotic sales or a step-up in China’s distribution expansion.